Proprietary & Confidential Claims in Discovery: The Battle to Build the Prudential Center

Whittling Away Claims of Confidentiality for an Auditor’s Technique

When TV news reporters questioned former Newark Mayor Sharpe James regarding why construction had commenced to build the new arena when the City of Newark had no money to pay for it, he replied that he intended to settle Newark’s billion dollar damages suit against the Port Authority of New York & New Jersey. That’s exactly what happened, and after a $400 million settlement, the rest is history.

At some point after the new millennium, both New York City and Newark came to realize that Port Authority owed hundreds of millions, and perhaps billions, of dollars for back rents spanning decades. Each commenced separate damages suits against the Port Authority. But during discovery Port Authority’s outside auditors, a Big-4 international accounting firm, balked at producing thousands of documents, claiming that its audit techniques were proprietary and confidential. The case stalled and then attorneys in the case agreed to engage Joseph Cipolla, the CPA and forensic accountant, to review and evaluate thousands of documents to determine whether the cache withheld documents were, indeed, proprietary and confidential.

In concluding that more than 60% of the withheld documents were not proprietary and confidential and should be produced, Cipolla was guided by established in case law. First, Cipolla concluded that documents and memoranda within more than 100 volumes of work-papers not directly related to audit techniques were discoverable. In general, Cipolla concluded that documents or work-papers that contained information but were not a “work program” or illustrative of a methodology could not be propriety.

In addition to the technical aspects of this discovery engagement, there was another critical issue: what exactly was the universe of documents and work-papers created over many years that needed to be evaluated. This was especially daunting because of the extensive use electronic work-papers, Microsoft Word documents that were not “locked down” and/or saved and discrepancies between both parties as to what documents had actually been already produced and which were listed on a “privilege/proprietary” log. Things got particularly ticklish after Cipolla located sensitive documents that apparently were neither produced nor on the log. The case settled shortly after the Cipolla report was rendered.

Forensic accountants are often engaged to perform valuation, fraud and forensic investigations for assessing lost profits and the extent of diversion of assets, damages assessment for personal injury insurance claims, or other economic damages. They often assess causation factors that may give rise to reasonably certain damages. Forensic accountants, as part of damages claims, also provide expert testimony and analysis regarding failed mergers and acquisitions, accounting and legal malpractice, and white-collar criminal defense, which often involve allegations of tax fraud and related investigations by the IRS Criminal Investigation Division in conjunction with the U.S. Attorney’s Office. Although white-collar crime and tax-fraud defense often do not involve testimony by the forensic accountant since they are often engaged in a Kovel capacity as a consultant to the defense attorney, most other litigation involving forensic accountants gives rise to an expert report and related testimony.

Cipolla & Co. regularly assists with the defense of accounting and legal malpractice claims, as well as affirmative and rebuttal damages assessments in complex commercial litigation matters, which are tried in the courts or by arbitration, often involving non-binding mediation which sometimes leads to a negotiated settlement. With respect to business-divorce and shareholder derivative claims, Cipolla often assess valuation using myriad standards, including fair value, fair market value, strategic or investment value, enterprise value, intrinsic value, book value with equitable adjustments, liquidation value. Cipolla also considers discounts for lack of control, marketability, and key-man/key-person, tax-affecting of pass-through entities and other tax and non-tax factors, such as, reasonable compensation for owner-operators of businesses. Cipolla also has extensive experience with hedge fund and FINRA litigation, and estates and trusts litigation.

Joseph Cipolla has been involved with tax and white-collar criminal defense, forensic accounting, valuation and damages assessment for over three decades and, according to the New Jersey Law Journal readership survey, was recognized as the best matrimonial financial expert, and his firm as the best economic damages accounting firm and one of the top forensic accounting firms in the New York metropolitan area. At Cipolla & Co., “we peel the onion” to provide thoughtful, comprehensive and thoroughly researched opinions and conclusions.